Outsourcing has proved to be a major "hot potato" for the US healthcare industry. Coming from the UK, the healthcare system in the US is like comparing a Porsche with a Lada, but the British National Health Service (NHS) has, in recent years, been resorting to outsourcing major pieces of its back office infrastructure in efforts to slash cost, centralize and standardize processes, and access skilled IT services it simply does not have inhouse. I don’t believe the NHS would have dragged itself from a 1950s infrastructure to something vaguely resembling a modern-day organization, if it wasn’t for the outsourcing services that have been provided by Accenture, EDS, IBM, Steria (Xansa) and others. Outsourcing provided a shock to the system that forced reform and modernization it was never going to achieve on its own.
When you spend time studying the improved efficiencies and cost saving opportunities from which hospitals, managed healthcare providers and ambulatory services can benefit, simply by centralizing and standardizing their operational processes, you will scratch your head to understand why this industry has been so resistant to change. These operational functions include specific healthcare processes such as revenue cycle management, contract management, clinical data management, patient accounting system management, in addition to the classic general and administrative processes such as application management, payroll, benefits admin, transactional accounting and management reporting services. I have seen cost savings opportunities well in excess of 50% from original budget (and sometimes even more) that many healthcare providers can take advantage of, by outsourcing many of these processes to providers such as ACS, Perot Systems or Vengroff Williams, which specialize in taking on healthcare processes from both onshore and offshore locations. Perot, for example, has significant medical coding resources in Bangalore, which comprise qualified medical personnel to take on routine revenue cycle processes such as medical insirance coding. Vengroff Williams has service centers located onshore within the United States for healthcare providers nervous of taking processes offshore.
So why is this industry one of the least willing to adopt third party services? Much of the problem is cultural – healthcare managers tend to stay with organizations for very long periods, and if they do switch jobs, will move into other organizations with similar infrastructures. Things do not change much. Most of the administrative functions are layered with top-heavy management structures that are highly resistant to change and argue that outsourcing will severely disrupt the quality of their services, and ultimately the quality of healthcare. Perspectives of third-parties are that they will never be able to deliver the quality of services as well as they do themselves. The healthcare industry has also been, on the whole, highly profitable, and the onus to take on "disruptive" strategies such as outsourcing has never been as strong as it is for highly competitive industries such as manufacturing and consumer business. And I can tell you from experience, that outsourcing is rarely successful where the resistance is deep and senior managers simply will never buy in.
The US healthcare industry is plagued by high costs throughout its value-chain – from the drugs companies, through to the doctors’ salaries and finally through to the heavy administrative costs of healthcare services. My view is that we need to see a knock-on effect throughout this value chain to reduce the overall cost of healthcare in the US, and outsourcing is just one catalyst to enable this. The pharma industry is going to be the spark for change ultimately, as competitive dynamics, globalization and low-cost generic products are forcing the incumbents to look towards new ways of stripping out cost and driving efficiencies. GlaxoSmithKline, Novartis, Bristol Meyers Squibb and some other leading pharma giants have recently entered into BPO engagements, and last week Astra Zeneca announced a significant engagement where Cognizant will provide clinical data management services. At the end of the day, competitive dynamics drive change, and this is the prime vehicle for outsourcing adoption in pharma. With increased competition and pressure to reduce costs among healthcare providers, surely it’s only a matter of time? Perhaps the next occupant of 1600 Pennsylvania Avenue will have a say in this?
I’ve just returned from an excellent InfosysBPO customer event in Philadelphia. Was refreshing to have a services firm allow industry experts, its customers and prospects talk freely about the industry and the burning issues. I especially enjoyed:
TPI’s Sue Danino, leading a panel discussing pricing models;
Wayne Mincey from the Hackett Group treated us to some confidential new data on world-class performance (a lot of vigorous note-taking during that one…);
Jason Busch on top form discussing the exorbitant price of zinc and how this impacts procurement BPO;
Micheal De Zeuw, Infosys’ VP in charge of their Philips BPO engagement, discuss their journey;
One of the key issues that came out of the AMR panel was the discussion centered on whether "your vendor is really your partner". Sunil Narang, VP of Finance for Level 3 Communications, vehemently argued the case that his firm would have never achieved the success it has with its BPO, if it hadn’t developed a partner-style relationship with its provider, based on a great deal of mutual trust and working together. On the flip-side, I have had many discussions with other sourcing executives who claim their vendor relationship is definitely not a partnership, but a contractual agreement.
My view is you really have to take control over your vendor relationship and drive the agenda, and it often takes a couple of years to get to the stage where you and your vendor feel you have a good understanding of what you need. If you can develop a relationship which feels like a true partnership, then you must be doing an great job, as this is not the case with everyone. Much depends on the skill of the sourcing leader within the buyer to create a mutually workable outsourcing environment. However, this is a skill that most executives need to learn "on-the-job" through real-life experience. So if you have not lived and breathed an outsourcing relationship, treat the situation like a marriage with a very solid pre-nuptual agreement. Love to hear your views on this….
Is there such a thing as being over-networked? While it’s practically impossibly to get finance professionals, for example, to do anything but worry about their work and pry them away from their offices, HR folks can’t seem to get enough of seeking out the next shindig where they can listen to best-practices all day long and hobnob with their peers from other firms.
My good friend Mark Stelzner, over on his blog Inflexion Point, has hit upon this issue with his coverage of the litany of member-based HR associations and consortiums. I have never witnessed an industry which is as networked as HR. Everyone knows everyone, and senior HR personnel seem to spend an exhorbitant amount of their time traveling to these conferences:
It’ll be interesting to hear your views on associations you frequent and whether your industry has the peer networking you need to do your job more effectively.
I’ve been deluged with many private emails and comments since I posted "The low-cost outsourcing advisors are on the march". Some passionate views out there, but one thing’s for certain, there has never been as great a need for sourcing advice as there is today… and there has never been such a plethora of advisors competing to give their advice. And whether you are a highly-sophisticated enterprise with your sourcing experience, or a complete novice in this domain, you will most likely have to engage a third-party, whether it’s simply to administer and negotiate a complex contract, or to hold your hand through the entire evaluation process, contract signing and beyond. At the end of the day, it’s "horses for courses" with every firm… you should know best what help you need, so make sure you engage an advisor with experience in those areas who will give you value for money. If your enterprise has been through complex outsourcing in the recent past, the chances are you will need a lighter-touch approach, but if this is a first-time experience, my recommendation is to seek expert help throughout the whole process.
My view?
On the whole, you get what you pay for. However, I have seen situations where enterprises paid top-dollar for third-rate advice, and others which received great service from one of the smaller, cheaper firms. Buyers are also getting smarter and better educated with sourcing issues, and I am also seeing more firms (mainly FORTUNE 500) trying to do more themselves and rely less on advisors. This is a natural control mechanism when companies take themselves through such sensitive change.
I am getting questions almost daily from buyers asking who/how they should approach selecting a third-party. It’s becoming almost as important as which vendor to select. I’ll be expanding more in a forthcoming research article on sourcing advisors, which will focus on the core competencies enterprises must look for in a sourcing advisor firms.
An advisory firm’s competences, in my experience, must include the following:
1) The ability to share IP internally to leverage for its client engagements;
2) The depth of experience of its advisors within the firm.Harvard MBAs are a nice-to-have, but this is largely deep operational work conducted at a level below the ivory tower;
3) The advisory firm’s mix of experience – this should be include talent which has come from operational backgrounds who have experienced sourcing from the receiving end, not simply staff with outsourcing provider and previous sourcing advisory experience;
4) The firm’s ability to "advise" and not just "consult". I’ll expand more on this in the forthcoming article;
5) True "independence" in achiving the optimum outcome for its clients.They must be focused on YOUR best interests, and not their’s;
6) A deep focus on IP, benchmarking data and research – their own and from reputable research firms. An advisory team of 3 or 4 people will never know everything… they need additional knowledge and support;
7) The operational business focus and experience of its advisors beyond simply negotiating contracts: i.e. post-transaction support, retained org design, vendor governance support
8) A sensible, proven and flexible process for business case evaluation and vendor selection
9) Having the respect of vendors – vendors will work well with advisors when they know they will get a fair crack of the whip. The last thing you want is an advisor who can’t rally vendors to propose on your business;
10) Multiple client references with whom you can talk to directly and discreetly.
Having just returned from a few days in snowy Dallas (?) I realized I should pre-warn people of my whereabouts in the coming weeks, as I will be speaking and paneling at several upcoming events:
I was going to write somethng dramatic about the "power of blogging"… but you can work that one out for yourselves. And a major hat tip to the Forbes technology editor, Elizabeth Corcoran, for publishing this.
So I checked out the credentials of the author. I couldn’t find any other outsourcing literature, but plenty of Yahoo-Microsoft commentary, which was pretty informative. However, I did find Sramana’s blog where she comments that the "Indian BPO industry is very much at risk because of the SaaS trend, and if they do not start to get their act together and respond to the trend, they are going to get punished". This is incorrect. SaaS applications actually enable delivery of BPO services for certain processes. Where software can be delivered as a pure web application, and does not require onsite maintenance and development, what better for a global delivery model where services are delivered from remote locations? True, SaaS threatens the traditional software model, but it actually compliments an outsourcing model. And surely SaaS is much more threatening to software providers than services firms, which dominate India’s outsourcing economy.
Moreover, Sramana claims "Yet, India, for all its glory, is still the world’s back office. India’s tech industry is a "services" industry. The Indians don’t do the thinking. The customers do. India executes". Er… isn’t that the point? However, what she plainly fails to discuss is the fact that the better the Indian services become, the greater the number of services that require the "thinking". It is no coincidence that IBM, Accenture and HP have employed 10% plus of their workforces in India today to perform tasks that go beyond pure execution work. When you look at the scale and type of services being delivered from India today, as opposed to 5 years’ ago, the move up the value-chain of services being delivered from India is impressive. Services such as remote infrastructure management, financial reporting, insurance claims adjudication and industry-specific application development were a far-flung fantasy back then, but today are high-growth outsourced services being delivered for enterprises today.
Sramana picks on on ADP’s global sourcing model, which only has 2,500 staff in India. However, what she doesn’t comment on is that fact that very few firms outsource payroll to India, largely as this industry was established long before India came to prominence, but also because of the regulatory and privacy concerns tied to sending payroll data offshore.
I empathize with her concerns over wage inflation, staff attrition and rupee appreciation. These are the challenges the Indian industry is dealing with, which we discussed here last year, and it will slow down the breathtaking growth in the long-term, however, to proclaim the "coming death" of Indian Outsourcing is absurd.
I am seeing increased demand for outsourcing advisors early this year to facilitate outsourcing transactions. The applications outsourcing space, in particular, is showing no signs of slowing down as companies seek to renegotiate existing contracts and a host of enterprises are evaluating their options for the first time. Having spoken to several outsourcing providers over the last couple of weeks, I am increasingly seeing small advisors with low cost-bases in on the game. These firms can afford to work with clients and run deals for $250-600K for a typical 4/6 month outsourcing advisory engagement. The 4-6 month time-frame is what it typically takes to conduct a baseline analysis, develop and administer an RFP, downselect vendors and negotiate a contract. When firms want to negotiate a $10m ADM deal, for example, they do not want to spend more than 5% of the TCV on advisory fees to do the deal in the first place. This causes issues for the higher-cost advisors, who simply cannot afford to entertain low fees at this level to conduct the same work.
1) Enterprises need advisors to facilitate and negotiate deals for them. Quite simply, most enterprises do not have the inhouse expertise to manage these complex transactions themselves. They have to use third-party support, or risk getting a poor deal and poor service levels.
2) Once an enterprise has made the decision to outsource, it wants a transaction done with "no frills". Advisors are differentiating themselves in the market with their experience, their existing IP from previous deals, and their skills in helping firms make strategic outsourcing decisions, developing post-transaction governance programs, helping to manage the initial vendor relationship(s) and develop change management programs. While enterprises like these offerings, they only really care about getting a deal done and think they can take care of all the additional issues themselves. While we have outlined here the potholes many firms have fallen down in the evaluation process, many still only view the world in a short-term "transactional" way.
3) Short-term thinking is rife. Many executives put in charge of the outsourcing decision-making are not being made accountable to think long-term about the ramifications of outsourcing, and only really care about the short-term dynamics of performing a transaction with an outsourcing services supplier.
4) The small firms can afford to do this for less. When an advisory firm has a handful of employees, its running costs are often not a great deal more that its advisors’ salaries. It can outsource its marketing, IT support, travel support, and even switchboard. Normally, advisors work from home, so there is no office rent. Kit out some smart experienced outsourcing veterans with a laptop, blackberry and a corporate AMEX and you are in business. When you aren’t dragging around corporate overhead, such as heavy marketing, HR, IT and management costs, you can, quite simply, afford to do this work for far less cost.
5) The objective of outsourcing is usually to save money. When an enterprise is in the mindset to outsource, saving money is normally the prime driver, and this mentality normally transfers over to the cost of using an advisor to broker the transaction. If you can find someone to do the same work for you for 300K, as opposed to $1m, then you may be tempted to take a few shortcuts to get the same outcome.
6) The smaller firms may have some impressive consultants. At the end of the day, advisory services are only as good as the advice from the advisor giving it. If an enterprise feels the smaller firm knows how to broker an outsourcing deal as well as a bigger branded higher-priced advisor, then the choice to go with the smaller firm is a no-brainer.
As we reflect on enterprises’ strategies for this troubled economic climate, people seem to be thinking about the same old "routine" approaches for battening down the hatches and riding this out – i.e. mass layoffs and budget slashes across the board. This may be the case if this recession is longer and deeper than we fear, but in the shorter term, I am seeing many companies taking a different approach when bracing themselves for this forthcoming downturn than many past recessionary experiences.
The Human Capitalist blogs about the Talent Management software business and makes an interesting case for further growth in this industry, which got me thinking about the need for firms to protect their most prized people assets to ride out this this economic turbulence. If firms are buying talent management software, it is further evidence they are putting their talent issues high on the agenda. Why is this?
1) Firms remember well the dotcom bust and 9/11 nightmare, and are preparing themselves for this one well in advance. Many firms are stalling external hires and prioritizing filling vacancies with internal staff. They are hoping to minimize layoffs at all costs;
2) The aftermath of 9/11 instilled a cost-containment mentality into many companies and there is less fat to trim these days in a lot of companies (especially in HR, with that massive wave of HRO deals in 2001-2005);
3) IT and Business Process Outsourcing are increasingly becoming the logical cost-cutting measures with many enterprises focusing on farming out tactical / routine processes and placing increased emphasis on designing retained organizations (see earlier article). Outsourcing evaluation increases firms’ self-awareness and recognition of the people who add value to the business – i.e. those who perform more than simple routine duties that can be done for lower costs by third party providers;
4) The decline in young adult workers is driving increased concern regarding talent shortages – particularly among larger enterprises. Letting talent go now is likely to result is costly re-hiring when we exit this downturn.
Hence, the focus is more directed on developing and retaining talent than ever before. Let’s hope this downturn isn’t so severe that even these talent issues get thrown out of the window.
Outsourcing has proved to be a major "hot potato" for the US healthcare industry. Coming from the UK, the healthcare system in the US is like comparing a Porsche with a Lada, but the British National Health Service (NHS) has, in recent years, been resorting to outsourcing major pieces of its back office infrastructure in efforts to slash cost, centralize and standardize processes, and access skilled IT services it simply does not have inhouse. I don’t believe the NHS would have dragged itself from a 1950s infrastructure to something vaguely resembling a modern-day organization, if it wasn’t for the outsourcing services that have been provided by Accenture, EDS, IBM, Steria (Xansa) and others. Outsourcing provided a shock to the system that forced reform and modernization it was never going to achieve on its own.
So why is this industry one of the least willing to adopt third party services? Much of the problem is cultural – healthcare managers tend to stay with organizations for very long periods, and if they do switch jobs, will move into other organizations with similar infrastructures. Things do not change much. Most of the administrative functions are layered with top-heavy management structures that are highly resistant to change and argue that outsourcing will severely disrupt the quality of their services, and ultimately the quality of healthcare. Perspectives of third-parties are that they will never be able to deliver the quality of services as well as they do themselves. The healthcare industry has also been, on the whole, highly profitable, and the onus to take on "disruptive" strategies such as outsourcing has never been as strong as it is for highly competitive industries such as manufacturing and consumer business. And I can tell you from experience, that outsourcing is rarely successful where the resistance is deep and senior managers simply will never buy in.
Having just returned from a few days in snowy Dallas (?) I realized I should pre-warn people of my whereabouts in the coming weeks, as I will be speaking and paneling at several upcoming events:
